The document discusses the challenges and opportunities for small and medium enterprises (SMEs) resulting from India's demonetization policy in 2016. It notes that SMEs make up a large part of the economy but have centralized decision-making. Demonetization impacted SME cash flows and production but also created opportunities for SMEs through increased exports due to a weaker rupee, improved access to loans, and new markets in industries like banking and IT. While some industries suffered, SMEs could see long-term gains by embracing opportunities in exports, investment, capacity expansion, systems implementation, and diversification. The challenges for SMEs included short-term impacts to labor, sourcing, and cash flows. Ultimately

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Demonetization: Challenges & Opportunities for SMEs
On the eve of 8th
November 2016 honorable Prime Minister of India, Mr. Narendra Modi announced the
demonetization of 500 and 1000 currency notes. He also came up with the supporting statement that
this step was taken to curb the evil of black money, counterfeit currency coming from cross‐borders and
remove corruption. This announcement received both positive and negative feedbacks from different
sections of the society and industrialists.
This decision has undoubtedly impacted Small and medium‐sized enterprises (SMEs), which are a big
chunk of the economy contributing 8% percent of the overall GDP whilst employing more than 80
million people yearly. However, before analyzing its impact one should understand the decision making
process in SMEs.
In Indian SMEs the decision making is highly centralized and the management takes almost all the
decisions. Most of the time these decisions are made out of guts, experience or invalidated data
analysis. As a result, delayed or poor decisions are made, which become bottleneck for the growth of
the company. Also, managements’ focus and involvement in operational aspects lead to poor focus on
many important decisions related to growth, diversification & risk assessment, causing them to stick to
the same business model.
In current rapidly changing business environment, it has been evident that economic, political & legal
decisions made by government and introduction of new technology can either help a company grow
exponentially or gradually making it disappear, depending on the way they react to these changes.
Demonetization is a perfect example of one such impactful socio‐economic change.
Opportunities
Demonetization has brought various opportunities for the SMEs which they might consider for taking
future decisions for faster and stable growth.

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Currency Impact on Exports
The value of the Indian rupee is at a historic low. This means that Indian exports will be increasingly cost
competitive in the short to medium term. In this scenario, the Indian B2B businesses should rapidly
evaluate if their products could have a demand internationally. Those companies that already export
should explore ways to enhance the exports share of their turnover. By focusing on exports, SMEs can
not only tide over the short term pain of demonetization, but also build a foundation for a more
prosperous future.
The rapid growth of global ecommerce business and the presence of global ecommerce marketplaces in
India have made entry barriers for exports virtually nonexistent. A weak rupee is the positive trade wind
that B2B SMEs can use to set sail in the international markets.
Investment Opportunity
Deposit growth is likely to improve with more money coming into the banks, and impacting the savings
positively. SMEs can take the bank loans at cheaper rates and can invest it for capacity enhancement,
robust systems implementation and diversification of business.

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Capacity Planning and expansion
As there is an export opportunity and loans may be available at cheaper rates companies need to
reassess the internal capacity. Also, they need to decide whether to reinvest for growth or pay taxes on
profit. Hence Capacity Planning and Expansion becomes an important decision to make.
Systems Implementation
Demonetization and other related decisions taken by government will drive many SMEs which earlier
were using their personal contacts for sourcing, marketing & liaising with government officials to shift to
digital mode. As a result, market will become more competitive and SMEs will need to work on internal
inefficiencies which can only be overcome by implementation of robust systems so that they can
compete against MNCs by reducing costs and improved decision making.
Diversification
Time to enter into a new market place: ATM Machines, Swipe Machines, Smart phone demands and
Money transaction platforms has boomed within a night and is likely to grow exponentially. Due to this,
Moulding Industry, Electronics Manufacturing Industry and IT industry are likely to have a positive
impact and SMEs can diversify their business in these segments. This Diversification is need of the hour
for SMEs to hedge the risk associated with their particular industries.
Along with these opportunities demonetization will cause lesser corruption in Government
organizations which will lead to better planning, resulting into harmonious outputs and financial
stability. Also, scope of corruption within the company for SMEs will decrease wherein many companies
kept on focusing either to save taxes or to save from various government norms.

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Digital transactions will help them in better analysis, improved planning and improved ability to hedge
the risk which will lead to use the most important resource of any SME, i.e. the management’s time,
more effectively that currently goes into handling the cash accounts and transactions. Also, with
increased digitalization, hedging the risk by using new insurance products will become important for
them.
Challenges
Demonetization has brought a plethora of difficulties for SMEs for the coming 2‐4 months. It has
adversely impacted availability of labors, sourcing and cash‐flow leading to the underutilization or total
shut‐down of plants.
For some of the industries demonetization has impacted negatively. Construction and Real Estate
industries and other industries which are directly or indirectly dependent on them is impacted for this
period. Demand for Luxury items such as Gems and Jewelry, high End Retail, Auto Sector along with
Auto Component Sector will tend to decline.
Therefore, looking at the opportunities and challenges of Demonetization it can be concluded that the
medium to long‐term gains are likely to outweigh the short‐term pains. However, change in
management’s thinking also becomes the most important and vital aspect with respect to the current
scenario. And whether to take demonetization as an opportunity or as a threat; it’s the thinking of the
management to grow either bigger or die by resisting the change.
Author: Ashwani Kumar holds 5 years of experience helping SMEs growth in Steel & Automotive
Component industries using Operational excellence, LEAN & Six Sigma concepts. He is a graduate
from IIM Rohtak with a Mechanical Engineering background from IIT Delhi and currently running
Sookshm Management Consulting Firm catering to SMEs.
For more such articles on SMEs please visit http://sookshm.co.in/blogs/

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